"M" is for Mortgage (and Mullet)

Acquiring financing in these tumultuous times is probably the freakin’ scariest aspect of purchasing a home, or at least it will be for this Debt Ninja. If you are looking for financing or refinancing for your home, whether looking at an FHA mortgage, jumbo mortgage, VA mortgage, or a reverse mortgage, make sure to research the crap out of the various lenders so that you can take advantage of the lowest mortgage rates available.

Most conventional mortgages, with an affordable interest rate, typically require a down payment of anywhere between 5-20% of the purchase price. That can end up being a hefty chunk of change, but the general rule of thumb is choose the largest down payment plan you can afford- if possible 20% – with closing costs that equal up to about 3% to 5% of the purchase price, but you better make darn sure you have enough money left in your savings account to cover three to four months worth of housing expenses. A larger down payment will reduce the size of your loan, start you off with a lot of equity upfront, and possibly allow you to avoid paying private mortgage insurance. All around a pretty sweet deal if you ask me 🙂

There is also the option of getting a mortgage with little or no down payment. Before the housing market crash, lenders were increasingly willing to finance as much as 95%, 97% ,or even 100% of the home’s value. Essentially you could be broke, but still buy a pretty sick house. Generally speaking, the larger loans have higher interest rates than smaller loans. Why? Because mortgage lenders consider these highly risky (aka sketchy) loans. The borrowers may not only have to pay a higher interest rate, but they will also be stuck paying for the private mortgage insurance. Basically this is a pretty terrible option and I wouldn’t recommend using it, but I got to state the facts and this does work for some people.

Pretty much the only benefit to the larger financing options is the fact that it allows families with low or moderate incomes to be able to enjoy the life of homeownership…that is until they get foreclosed on for buying something they can’t afford. The recent housing market collapse, has left us all asking “Should someone that can’t afford to put down 10% on a home, be allowed to purchase one at all?”

6 thoughts on “"M" is for Mortgage (and Mullet)

  1. We bought our home before the crash and paid roughly 115k for it. We had no money to put down and even financed the closing costs right into the loan (original price was 110). The house is a very modest house and nothing more than what we needed. We still live there now, three years later, have never missed a payment and have refinanced to a much better rate. It does work for some people. We knew exactly what we needed, the amount we were able to pay for a mortgage and did our research.

  2. @ Jesse- You're right. I guess I tend to forget some people did take out a 100% loan, but it was on a mortgage they could still afford.

    Sorry for lumping your category in with the heaps of people that did actually go outside their means and finance a giant mortgage, particularly those with ARMs.

  3. I'm totally going with an ARM, for the first 5 years anyway.

    ING Direct Easy Orange 5/1 ARM. Then after 5 years, refinance into a 15-year fixed.

    Money. Requires a 25% down payment.

  4. Not everyone who gets a 95+% loan will end up being foreclosed on. I've purchased 2 homes in the past with 100% loans and I still have both of them. I've never been late on any of the payments.

    -Single Guy Money

  5. Ninja,

    Jessie and Single Guy Money are examples of what I'm doing. I'm buying an older home for 115k in Miami, not the best neighborhood but one where in 3 years when I decide to upgrade or decide to marry etc, I can rent out for a tidy monthly profit. I'm borrowing exactly 2.5 times my salary and at a 4.7% interest rate through a FHA loan. Add in the 8k tax credit and seems like a good deal, even though i'm nowhere near the 20% down payment.

  6. I still think everyone should be required to have 10% in savings prior to qualifying for a mortgage, regardless if they actually put any of that money down on the house. Saving 10% at least shows that the person is able to save and not living paycheck to paycheck.

    I will say though, that those of you who did finance 100% sound like you did your homework and still bought within your means so props to you. The five year loans sketch me out though still, because a lot of people that bought houses five years ago are screwed right now as their interest rate went through the roof, but they were unable to sell cause their house depriciated.

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